Goldman plans $250m 'social impact' fund

Goldman Sachs is launching a $250m "social impact" fund whose returns are linked to the success of projects such as affordable housing, pre-school education and how many young criminals commit new offences after leaving New York's notorious Rikers Island prison.

Wall Street banks are increasingly vying for the kudos and cash that can come with investing in projects intended to improve conditions in cities US-wide.

Morgan Stanley on Friday said it was establishing the Morgan Stanley Institute for Sustainable Investing, with a goal to attract $10bn of client funds for projects intended to provide social benefits as well as financial returns.

More used to fighting each other for lucrative investment banking business such as Twitter's initial public offering, the companies are to compete in regard to sustainable investing.

"We'd love more competition in this field," said Alicia Glen, head of Goldman's Urban Investment Group. "It would be great if more capital was deployed to helping figure out how to provide more access to early childhood education and keeping kids out of jail."

Sovereign wealth funds, too, have started to make such investments to soften their image. Qatar's $100bn sovereign wealth fund, for example, recently made an initial investment of about $400,000 to boost the supply chain of agricultural goods in east Africa.

To burnish their own credentials in corporate social responsibility, investors have for years diverted some capital to portfolios of publicly quoted companies that claim to fulfil a social benefit. Such investing forms part of the Morgan Stanley initiative, although it also plans to invest in private equity funds that meet the guidelines and channel money to affordable housing.

Goldman claims its fund will be the first that allows companies and wealthy individuals to invest directly in a portfolio of private projects.

Goldman has already invested $3bn of its own capital in programmes that have a "double bottom line" in the jargon of the sector - profits plus a positive social effect. They also allow US banks to earn credits towards their Community Reinvestment Act report card, a law that obliges them to direct a portion of their lending to deprived areas, as well as to try to reap public relations benefits.

But Ms Glen said there has not been the opportunity of marrying the two - allowing outside investors to fund the sorts of projects that her team has worked on for more than a decade.

Among Goldman's investments in New York, is the Kalahari, a Harlem apartment building built in 2008 with money from Goldman, designed to accommodate a mixture of the well-off and working middle class normally priced out of similar Manhattan properties.

That sort of mixed housing is likely to feature in the portfolio alongside "social impact bonds", a concept begun in the UK that has been seized upon by New York City and Goldman.

One example has Goldman investing in an educational project for young prisoners on Rikers Island. If the reoffending rate among the group is low, Goldman makes a profit; if it exceeds a target, then the bank makes a loss.

"Although there's no hard data on recidivism yet - kids go to jail and you have to track them after they leave in order to see the impact on reincarceration - a lot of the qualitative feedback is positive," said Andrea Phillips, another banker in Goldman's Urban Investment Group.

Goldman's social investing is separate from its charitable endeavours, which have attracted some scepticism inside and outside the firm. Warren Buffett, the billionaire investor and one of Goldman's top shareholders, told the New York Times last week that although the bank's endeavours were "the best that I have seen", it invested an "unusual" amount of its shareholders' cash to charity. "I personally don't like the idea of giving away other people's money," he said.

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